Pseudo rough vol-of-vol through Markovian approximation

Henrique Guerreiro and João Guerra

No 2024/0310, Working Papers REM from ISEG - Lisbon School of Economics and Management, REM, Universidade de Lisboa

Abstract: We discuss a possible framework for a (pseudo) rough vol-of-vol model through a multi-factor Markovian approximation of the vol-ofvol process. We identify a key martingale condition which may allow to express the VIX in terms of the solution of a certain Riccati ordinary dierential equation. We derive this equation and provide sucient conditions for the existence of solutions. We also provide some partial results regarding the martingale condition. In particular, we verify a local martingale condition.

Keywords: VIX; rough volatility; Markovian approximation; exponentially affine process (search for similar items in EconPapers)
Date: 2024-02
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